Oil surges to four-month high as Russians, Saudis seen agreeing

[NEW YORK] Crude climbed to a four-month high as Saudi Arabia and Russia were seen agreeing on whether to freeze oil production.

Oil rose as much as 3.9 per cent in New York and 4.4 per cent in London. Saudi Arabia and Russia have reached a consensus on an output freeze, Interfax reported Tuesday, citing an unidentified "informed diplomatic source" in Doha. Saudi Arabia will make a final decision regardless of Iran's position, according to Interfax. Opec members will meet with other major producers, including Russia, to discuss capping production in the Qatari capital on April 17.

"The market has clearly shifted to the view that an agreement will be reached," said Mike Wittner, head of oil markets at Societe Generale SA in New York.

"There are talks going on behind the scenes, and occasionally we get bits of information. People are going to trade on these bits of news."

Oil has rebounded after falling to the lowest level in more than 12 years amid signs a global glut will ease as US output declines.

Saudi Arabia, the biggest Opec producer, said previously it would agree to a cap only if it's joined by other suppliers including Iran, while Kuwait said a deal can be done without Tehran's support. While Iran will attend the talks, it has ruled out limiting supply as it restores exports after sanctions were lifted in January.

WTI, Brent West Texas Intermediate for May delivery rose US$1.42, or 3.5 per cent, to US$41.78 a barrel at 12:47 pm on the New York Mercantile Exchange.

It reached US$41.94, the highest price since Dec 4. Total volume traded was 50 per cent above the 100-day average.

Brent for June settlement advanced US$1.62, or 3.8 per cent, to US$44.45 a barrel on the London-based ICE Futures Europe exchange. The contract touched US$44.73, also the highest since Dec 4. The global benchmark was at a US$1.31 premium to WTI for June delivery.

The likely outcome on April 17 will be "a soft agreement which would not really do anything to fundamentals," Jeff Currie, head of commodities research at Goldman Sachs, said in a Bloomberg Television interview.

Anything stronger is "not in anybody's interest right now," Mr Currie said The Organization of Petroleum Exporting Countries' next scheduled meeting is on June 2 in Vienna.

"The markets could be thinking freeze in April, maybe cut in June," Societe Generale's Mr Wittner said.

Declining Output

Prices climbed earlier as forecasts for lower US shale production signaled the global glut will slowly diminish. Output from US shale formations will drop to 4.84 million barrels a day in May, the lowest in almost two years, a report Monday from the Energy Information Administration showed.

The EIA cut its 2016 US oil production forecast to 8.6 million barrels a day from 8.67 million forecast in March, according to its Short-Term Energy Outlookon Tuesday.

"Prices are up on speculation that market tightening is underway," said Gene McGillian, a senior analyst and broker at Tradition Energy in Stamford, Connecticut.

"The productivity report yesterday shows that shale production will drop. There are also hopes that a production deal will be reached at this weekend's meeting."

Still, American crude supplies probably rose last week, remaining near the highest level since 1930, a Bloomberg survey showed. The stockpiles probably increased by 1 million barrels, according to a Bloomberg survey before an EIA report tomorrow.

BLOOMBERG